“They’ll absolutely have a wow factor, because it’s Tesla,” says Gary Silberg, an automotive analyst with KPMG. “They’ll know how to market it, and from that perspective, there’s no doubt in my mind it’s gonna be a big success.”
Tesla doesn’t have to worry about creating a market for the 3. Nor does it have to worry about actually building it. No, the upstart automaker has to do something much harder.
If the company is to truly influence, let alone change, how humanity moves around, it must become more than a niche automaker building luxury vehicles and playing gadfly to the big players. That means producing vehicles on a massive scale and generating sustainable profits. To do that, Tesla must think and act a lot more like the very automakers Musk is so quick to ridicule as out-dated and old-fashioned.
It’s time for Tesla to grow up.
A Different Kind of Car Company
Martin Eberhard and Marc Tarpenning founded Tesla Motors in 2003. Musk, flush with cash after selling PayPal to eBay for $1.4 billion, joined in early 2004 as its chairman and primary benefactor. He took over as CEO in 2008, shortly after the debut of the company’s first car, the Roadster. The two-seater was a proof of concept, designed to show that EVs could be cool. It was based on the Lotus Elise, hit 60 mph in 3.7, and squeezed 245 miles from a 950-pound battery. Car & Drivercalled it “a revelation”. Tesla sold about 2,400 Roadsters in four years.
Then came the Model S, a truly remarkable sedan good for almost 300 miles on a charge. Even now, four years after its debut, the sedan remains a marvel. It’s everything most people would ever want in a car—roomy, comfortable, practical, quick, and reliable. Motor Trend and Automobile Magazinecalled it the car of the year in 2013, and Consumer Reportsgave it its best score ever.
The strategy is to enter at the high end of the market, then drive down market as fast as possible. Elon Musk in 2006
Tesla has steadily improved the S, using over-the-air software updates to make every car even better. It made hardware changes, too, offering a second motor to provide four wheel drive, bigger batteries for more range, improved electronics, and self-driving capabilities. The 0 to 60 time plunged to a stomach-dropping 2.8 seconds—on par with six-figure exotics.
Meanwhile, Tesla built an international network of 1,600 “superchargers” where owners can plug in for free and charge the battery to 80 percent in as little as 30 minutes. It fought for the right to sell cars directly to customers. It took over an enormous factory once owned by GM and Toyota. It broke ground on a “gigafactory” where it will work with Panasonic to build almost unimaginable numbers of batteries. And in October, it introduced the Model X, a handsome, falcon-winged SUV based on the Model S.
So far, so good.
The Master Plan
All off this has unfolded in accordance with the “master plan” Musk laid out in a 2006 blog post. “Almost any new technology initially has high unit cost before it can be optimized and this is no less true for electric cars,” he wrote. “The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model.”
Thirteen years after Eberhard and Tarpenning founded the company, Tesla remains firmly entrenched in step one of that process. Its cars are wonderful, but have only gotten more expensive over time. When he announced the Model S in 2009, Musk said it would start at $57,400. Today the base price is $70,000 and the average sale price is $105,000, according to an estimate Morgan Stanley made in 2014, before the company added pricey—and popular—upgrades like autopilot and all-wheel drive. (Tesla will not reveal the average sale price of its cars.)
Nobody makes money—or not a lot of money—on the low-end brands. Automotive Analyst Gary Silberg
Of course, there’s a reason automakers love the luxury market—it’s where the money is. “Nobody makes money—or not a lot of money—on the low-end brands,” Silberg says. Hans-Werner Kaas, a senior partner at McKinsey, says luxury cars offer margins around eight to nine percent, double what you usually get from volume products.
Even with Porsche, Audi, and others jumping into the high-end EV market, there’s no reason to think Tesla wouldn’t hold its own in an increasingly crowded market. It could very easily continue selling 90,000 or so sedans and SUVs a year and keep everyone happy.
But that’s not how you change the world. And Musk, more than anything, wants to change the world. It’s true with Solar City, it’s true with SpaceX, and it’s absolutely true with Tesla Motors, a company with the stated mission of “accelerating the world’s transition to sustainable transportation.” You don’t do that selling cars only to people in places like Palo Alto and Los Angeles and Scarsdale.
You do it selling cars to everyone.
A Fresh Face
The Model 3 is the car to do that. Autopilot features come standard, and Musk promises five-star safety ratings in all categories. Inside, the Model 3 feels just like the Model S and X—sleek and minimalist. The whole roof is glass, which makes any sunroof look like a peephole. And Tesla’s trademark enormous center console screen—here 15 inches instead of the usual 17—has been flipped to sit horizontally.
“You will not be able to buy a better car for $35,000,” Musk says. The first cars, produced in late 2017, will go to West Coast customers, with deliveries gradually moving east. Europe and Asia will follow, along with right-hand drive markets. Current Model S and X owners get priority. Tesla’s history teaches us most customers will have to wait months, or years, to get their car. And it shows us that car is worth waiting for.
Growing Up by Driving Down
For all Musk’s talk of disrupting the industry, Tesla Motors has been little more than a voluble pest. The company sold 50,580 cars last year. General Motors moves that many in a single weekend.
That explains how GM won the race to build the 200-mile, $30,000 electric car. It threw time and money and resources at a really hard problem—building an EV that delivers on those two metrics is no easy feat—and spent more than a decade solving it. And it relied upon the sprawling infrastructure and established supply chain that makes building and selling huge numbers of cars (relatively) easy.
And that is the world Tesla is entering with the Model 3. The fixed costs of the auto industry—the equipment, materials, labor, and so on—make for slim profit margins on a $35,000 car. “You need to have your different types of cost and profit levels really tightly under control for making money in such a segment,” McKinsey’s Kaas says. And you have to drive volume. To get your return on upfront investments into equipment, Kaas says, “you need scale.”
They have to make sure that they make a profit. Kelley Blue Book Senior Analyst Rebecca Lindland
Tesla is slowly getting there, and investing $1.5 billion to do it. Battery production at the Gigafactory in Nevada should begin later this year. Things are ramping up at its automotive factory in Fremont, California, where GM and Toyota turned out half a million Vibes and Corollas and other models annually. Tesla wants to hit that number by 2020, which would make it as big as Dodge. And the company is expanding a retail network that already includes more than 200 stores in North America, Europe, China, and Japan. It’s going to double the size of the Supercharger network.
The challenge is scaling up quickly enough to meet demand and make money. General Motors can afford to take a loss on the Bolt because more profitable models pad the bottom line. Tesla—which has never had a profitable year—doesn’t necessarily have this luxury, especially if the 3 is to be its primary product. “They have to make sure that they make a profit,” says Rebecca Lindland, a senior analyst at Kelley Blue Book.
Profitability means using many of the tricks everyone else uses. Sharing parts between models, buying in volume from suppliers, and finding the best prices on things like wire harnesses, insulation, vents, and the myriad other parts consumers never see. “That’s where you need to save as much money as possible,” Lindland says.
It’s an exceedingly tough game to play. Tesla has clearly done far better, and lasted far longer, than other upstarts (Tucker, Delorean, Fisker) that thought they could rewrite the rules. But an increasingly competitive market has killed far more established automakers. Remember Saab? How about Pontiac?